Why CEOs of socially responsible companies face a higher risk of getting fired
As a consumer, you may feel a little better knowing that stores where you shop pay their workers a fair wage, hire a diverse workforce and avoid polluting the environment. But if you’re a CEO trying to run your business in this way — known as practicing corporate social responsibility — you may actually be taking on an unexpected personal risk, a new study finds.
Indeed, CEOs of socially responsible companies are actually 84% more likely to be fired than counterparts at less socially responsible companies — if the firms in question suffer similarly poor financial performance, according to a paper in Strategic Management Journal from researchers at the University of Oregon, University of Georgia and University of Notre Dame.
Now, the study found this trend can cut both ways: CEOs of financially successful CSR companies are indeed less likely to be dismissed. But that effect is not as strong — giving those CEOs whose firms do good and do well only a 53% decrease in firing likelihood.
In other words, the risk is disproportionate: “This study has been a double edged sword,” said Notre Dame management professor Tim Hubbard, one of the paper’s authors. “I like CSR [and] I want to encourage it. But the results are what they are.”
Why does this happen? For one, if shareholders think a CEO’s job is make them money — and investing in, say, safer products or in a more sustainable office space is expensive — it can create the impression the CEO is cutting into profits. Indeed, the authors say one theory to why CSR-focused CEOs can be more likely to get fired is that the decision-making around social responsibility is highly public, and can be contentious.
“The way we look at it, CSR frames how... financial performance is viewed,” Hubbard said. “So if a CEO is performing poorly, the board looks at those investments and says, ‘Not quite sure those were the best things to do.’ ... These are very visible investments.”
To arrive at their findings, the authors studied CEO turnover in Fortune 500 companies between 2005 and 2008, and then compared their financial performance with external assessments of their investments in corporate social responsibility initiatives.
Hubbard said that five different sorts of investments counted toward CSR in the study: Investments in safer products, the environment, employee diversity, employee benefits, and community — meaning, for example, companies that give money to local philanthropic initiatives.
How should CEOs get paid?
CEOs of large firms make plenty of money: The take-home pay of CEOs of America’s 350 biggest firms is about 271 times the rate of a typical worker, a recent Economic Policy Institute study found. But the way CEOs earn those sky-high salaries has been criticized as encouraging short-term planning — and that pay structure could be tweaked for everyone’s benefit.
Much executive compensation is tied to company stock, which is meant to align their interests with shareholders. Yet critics say it encourages leaders to focus too heavily on daily stock swings, as opposed to taking the long view.
After all, executives who make expensive investments in sustainability may not see a payoff for years. For that reason, some compensation experts have actually argued that executive pay should be tied to hitting sustainability goals.
For his part, Hubbard says that executives need a “mandate” from their board to pursue these types of responsible investments — and to be cut some slack if some of the investments don’t yield returns immediately.
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